Hate Budgeting, Love Shortcuts?

Budgeting is like sitting in traffic; no one wants to do it, but it is essential for arriving at your destination. When you build a spending plan that is based on past expenses and future goals, you will be set up for success. There are several software applications available to help with these details. Forbes did a nice review of the options, their purpose, and costs.

Budgeting apps can provide a wealth of information if used appropriately. However, during that first year of use, it takes time for set-up, ensuring expenses are properly categorized, etc. Some people do not have the time to delve into budgeting in a detailed way using yet another app on their computer or iPad, just like we don’t want to spend our time in traffic.

So, how can you do this without waiting in traffic too long? Using prior year tax returns is a shortcut Apella advisors use to help their clients generate a reasonable spending number without major headaches. It’s an educated estimate rather than a perfect figure, but it is a great place to start to understand what you spend annually.

First, have your most recently filed tax return on hand. Hearing “tax return” can be daunting, but I assure you this won’t take much time. You will also need your W-2 Forms (W-2s) if you have earnings, along with your year-end investment statement. If your investments are held with more than one custodian, you will need each of them.

To determine if you spent more or less than you had available, you can review the change in your total cash balances:

• Personal Checking & Savings at the end of the year
• Personal Checking & Savings from the beginning of the year
• Total Checking & Savings for the year

Did your balances in these accounts go up or down? Perhaps they went down because you were saving more (see the chart for contributions to a brokerage or savings account), or, alternatively, perhaps the total checking balance decreased because you spent it.

Now that you know the basics, it’s time to understand what that means. There is a bit more work to do to get there.

Let’s say your total “Net Available to Spend” at the bottom of the chart is $100,000. What are the big pieces of that puzzle? These might include:

• Mortgage payments
• Car payments
• Travel
• Home improvements or maintenance
• College tuition
• Special circumstances, like inheritance or self-employment income and expenses

Typically, financial advisors will break out these numbers separately for several reasons:

• Mortgage and car payments (principal and interest) do not increase over time and have a set end date.
• Travel tends to vary and may be higher in some years than others.
• Home improvements and maintenance may include major renovations or things like replacing a roof.
• College tuition is a short-term, often costly expense, but it may be covered by other sources such as a 529, gifts from grandparents, loans, etc.

What remains after those items are removed is your regular monthly living expenses. This level of detail can be enlightening for understanding your overall spending. It provides a great starting point for discussing your spending plan with your advisor, without the need to meticulously track each expense throughout the year. Who doesn’t want less time in traffic? It can also highlight expenses that may be less relevant in retirement, as well as those that could be more expensive now, such as your mortgage payment.

If you are not saving enough toward your long-term goals, understanding your spending can help illuminate possible changes you can make. Your financial advisor can assist with this analysis and help you understand how your spending impacts your financial plan for the future.

Disclosures:

Apella Capital, LLC (“Apella”), DBA Apella Wealth, is an investment advisory firm registered with the Securities and Exchange Commission. The firm only transacts business in states where it is properly registered or excluded or exempt from registration requirements. Registration of an investment adviser does not imply any specific level of skill or training and does not constitute an endorsement of the firm by the Commission. Apella Wealth provides this communication as a matter of general information. Any data or statistics quoted are from sources believed to be reliable but cannot be guaranteed or warranted.

Apella Wealth does not provide tax or legal advice and nothing either stated or implied here should be inferred as providing such advice.